Financial executives should take note that the Federal Reserve recently began stress testing prolonged negative 3-Month US Treasury rates and how they would effect financial institutions. Should CFOs & Treasurers be conducting similar scenario analysis as a proactive liquidity risk management practice?

One of the key lessons financial executives learned during the 2008 financial crisis is that dramatic changes in the money markets can materially influence corporate liquidity positions. The money market environment would be vastly different if the Federal Reserve were to implement prolonged negative 3-Month US Treasury rates. As reported by Bloomberg, the reason why the Federal Reserve avoided negative rates during the 2008 financial crisis was because they wanted to avoid a "dangerous dislocations in the money markets."

Bloomberg goes on to mention that the Federal Reserve stated that "This [negative rate stress test] does not represent a forecast..." CNBC is reporting that the Federal Reserve is now using negative rates as part of their Dodd-Frank compliance to evaluate how financial institutions would react to "severely adverse" conditions.

Even though the Federal Reserve does not consider negative rate scenario analysis as a forecast, there are recent examples of central banks (ECB, BOJ, Danish National Bank, Swedish National Bank, Swiss National Bank) implementing actual negative rate policies. (re:Bankers vs. Mattresses) Therefore, the precedent has been set and the negative rate experiment has already begun.

For organizations with excess cash, negative rates may lead to an environment where financial institutions charge fees in order to maintain cash balances. As the European negative rates have shown, financial institutions will mostly incur this new cost of cash... to a point. There is a real negative rate tipping point that would require financial institutions to pass on negative rates to their customers. If this were to happen, financial executives would have to take into consideration the cost of cash in addition to the overall cost of capital. The "Cost of Cash" would require a re-evaluation of dividend policies, equity repurchases, commercial paper issuances and capital investments.

The question for corporate financial executives still remains... If a negative rate environment is on the minds of the Federal Reserve Board of Governors, would it not be prudent for all CEO's, CFO's and Treasurer's to conduct their own scenario analysis to determine the specific company risks associated with negative rates?

What are your thoughts? Please use the comments below to initiate a discussion.

"There is a real negative rate tipping point that would require financial institutions to pass on negative rates to their customers."